Investor activity began to plateau in the second quarter but even with higher interest rates and a slowing housing market, it's likely some groups will continue to find opportunity.

Real estate investors bought 87,500 U.S. homes in the second quarter, up 11% on a quarterly basis and 5.9% higher year over year, according to Seattle-based Redfin Corp. (Nasdaq: RDFN). Investors bought an all-time high of 93,700 homes in Q3 2021 but, as Redfin notes, investors continue to buy more homes than they did pre-pandemic.

Investors purchased a record $60.1 billion worth of real estate in Q2, and their market share was 19.4% of all homes purchased last quarter (down from 20.5% in Q1).

Defined by Redfin and most industry groups as an institution or business that buys residential real estate without intention of occupying it, investors have occupied much of the discourse around housing since the pandemic. Their overall investment in the for-sale housing market certainly became more prolific toward the end of 2020 and last year but, as analysts note, investors continue to make up only a small share of the overall market.

And outcomes for investors amid a cooling-down housing market will vary, said Sheharyar Bokhari, senior economist at Redfin.

"The easy or cheap money is probably harder to get for some of them" now, he said, owing to higher interest rates. "That’s probably impacting them, to some extent, in terms of how much they would purchase."

Outlook for iBuyers

Those in the home-flipping business, including so-called iBuyers, are particularly cautious now, Bokhari said, given the risk for price declines.

Especially for companies that bought a lot of homes last spring, in an attempt to not have too many losses on their books, they are now employing aggressive price drops early to attract buyers in the market and unload inventory, Bokhari said. (Redfin has an iBuying platform, RedfinNow.)

During its Q2 earnings call on Aug. 4, iBuyer Opendoor Technologies Inc. (Nasdaq: OPEN) CEO Eric Wu said current market volatility is requiring the company to be highly dynamic and rigorous in managing risk and overall inventory.

"We saw a steep slowdown in home transaction velocity and home-price appreciation from all-time highs, caused by a spike in interest rates and, subsequently, a change in mortgage rates at a speed we have not experienced in 40 years," Wu said. "As a result, these macro shifts had led to a faster slowdown in housing than we had forecasted."

In response, San Francisco-based Opendoor is pricing homes to sell them expeditiously and adjusting new acquisition home pricing to reflect market conditions, said Carrie Wheeler, chief financial officer at the company, during the call.

Andrew Low, Opendoor's president, said there are differences in performances across U.S. markets. East Coast markets, particularly in the Southeast and Florida, are continuing to do well, Low said, while central markets are more mixed. Western markets like Phoenix, Las Vegas and Sacramento, California, are a bit more challenging, he added.

Opendoor had 17,013 homes in its portfolio as of June 30, according to the company.

Executives at Offerpad Solutions Inc. (NYSE: OPAD), another iBuying platform based in Chandler, Arizona, reported similar softening in its Q2 earnings call on Aug. 3.

Brian Bair, chairman and CEO at Offerpad, said it's important to be decisive and be proactive with owned inventory during a quickly changing market, such as the current one. He, too, noted Southwest markets like Phoenix; Denver; Austin, Texas and Las Vegas have "visible softening," while the Midwest and Southeast continue to have active demand.

As of June 30, Offerpad owned 3,561 home across 27 markets, according to the company. Bair and other executives said homes in Offerpad's inventory were underwritten under very different market conditions.

Bair said, looking ahead, the company will be keeping an eye on affordability. The primary reason for the recent housing-market slowdown has been due to rapidly rising mortgage rates, while home-price appreciation hasn't abated, ultimately pricing out more buyers from the market.

"Affordability is becoming a very hot topic around here as (we look) at new markets," Bair said.

Outlook for short-term rentals

Investors who buy homes to rent them out are likely to see a more modest slowdown, and may even find opportunity in a potential housing downturn.

Christopher Wimmer, senior director at Fitch Ratings Inc., said strong tenant demand in the multifamily market has created solid leasing activity in single-family rentals since the onset of the pandemic. That's not necessarily going to taper off with a slowing economy and housing market.

"We think the business is benefitting from secular tailwinds," Wimmer said. "In particular, the aging millennial wave should continue to drive demand for single-family rentals, especially in relatively more affordable suburban markets."

He added the demand for space as people work from home more frequently has particularly benefited the single-family rental space. And, in an environment of dampening homebuying demand, there's a case to be made there could be even more demand for single-family rentals, Wimmer said.

Bokhari said, with slowing investor purchasing activity recently, it's possible some groups are waiting for opportunities later in the year — specifically as homebuilders unload their inventory with concessions.

"Those are prime properties for single-family rentals," he added. Price drops are happening more frequently now, Bokhari said, which may be causing some investors to hold off.

Wimmer also said any cooling off in the homebuying market could easily be seen as an opportunity for an institutional investor to acquire homes more cheaply.

Like the rest of the housing market, investors paid record amounts for a home in Q2. A typical home bought by an investor bought in Q2 cost $474,000 — a record and a significant increase from the $427,000 paid typically in Q1 and $423,000 the same time a year prior.


Source: Austin Business Journal 

Posted by Grossman & Jones Group on


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